Management report. Income statement 94 Balance sheet 94 Net financial debt 95 Cash flow statement 95

Transcription

1 Management report KEY FIGURES FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE Income statement 94 Balance sheet 94 Net financial debt 95 Cash flow statement 95 ANALYSIS OF BUSINESS ACTIVITY AND RESULTS 96 Presentation of results 97 Net sales growth and volumes of strategic brands 98 Contribution after advertising & promotion investments 99 Profit from Recurring Operations 99 Financial income/(expense) 99 Group Net Profit from Recurring Operations 99 Group Net Profit 99 NET DEBT 100 OUTLOOK 101 DEFINITIONS AND LINK-UP OF ALTERNATIVE PERFORMANCE INDICATORS WITH IFRS INDICATORS 101 COMPENSATION POLICY 102 Corporate officers compensation 102 Compensation elements due or granted for the 2015/16 financial year to the Company s Executive Director, submitted to the shareholders advisory vote 108 Other aspects of the compensation policy 109 Transactions involving Pernod Ricard shares made by Directors in the 2015/16 financial year (Article of the AMF General Regulations) 113 Directors equity investments in the share capital of the Company (position at 30 June 2016) 114 RISK MANAGEMENT 115 Introduction 115 Summary of the main risk factors to which Pernod Ricard considers itself exposed at the date of this Registration Document 115 Risks relating to business activities 115 Industrial and environmental risks 118 Legal and regulatory risks 120 Financial risks 122 Insurance and risk coverage 123 Risks and disputes: provisioning procedure 124 SIGNIFICANT CONTRACTS 125 Significant contracts not related to financing 125 Financing contracts 125 PERNOD RICARD 93

2 MANAGEMENT REPORT Key figures from the consolidated financial statements for the year ended 30 June 2016 Key figures from the consolidated financial statements for the year ended 30 June 2016 INCOME STATEMENT million Net sales 7,945 8,558 8,682 Gross margin after logistics expenses 4,987 5,296 5,371 Advertising and promotion investments (1,503) (1,625) (1,646) Contribution after advertising & promotion investments 3,484 3,671 3,725 Profit from Recurring Operations 2,056 2,238 2,277 Operating profit 1,817 1,590 2,095 Financial income/(expense) (485) (489) (432) Corporate income tax (305) (221) (408) NET PROFIT 1, ,255 o/w: Non-controlling interests Group share 1, ,235 Earnings per share basic (in euro) Earnings per share diluted (in euro) BALANCE SHEET million Assets Non-current assets 20,968 22,978 23,310 Of which intangible assets 16,449 17,706 17,572 Current assets 6,646 7,419 7,282 Assets held for sale TOTAL ASSETS 27,616 30,398 30,598 Liabilities and shareholders equity Consolidated shareholders equity 11,778 13,288 13,506 Non-current liabilities 11,933 11,972 12,137 Current liabilities 3,905 5,138 4,955 Liabilities held for sale TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 27,616 30,398 30, PERNOD RICARD

3 MANAGEMENT REPORT Key figures from the consolidated financial statements for the year ended 30 June NET FINANCIAL DEBT million Gross non-current financial debt 7,673 7,459 7,335 Gross current financial debt 1,219 2,052 2,027 Non-current derivative instruments assets (63) (51) (77) Current derivative instruments assets (1) (15) - Non-current derivative instruments liabilities Current derivative instruments liabilities Cash and cash equivalents (477) (545) (569) NET FINANCIAL DEBT 8,353 9,021 8,716 Free Cash Flow (1) ,061 (1) The calculation of Free Cash Flow is set out in the Note-Net Debt in the Management Report. CASH FLOW STATEMENT million Self-financing capacity before financing interest and taxes 2,089 2,220 2,315 Net interest paid (428) (455) (408) Net income tax paid (413) (538) (393) Decrease/(increase) in working capital requirements (308) (193) (178) Net change in cash flow from operating activities 940 1,035 1,336 Net change in cash flow from investment activities (311) (264) (359) Net change in cash flow from financing activities (632) (735) (928) Cash flow from discontinued operations Foreign currency translation adjustments (117) 32 (25) Cash and cash equivalents at beginning of period CASH AND CASH EQUIVALENTS AT END OF PERIOD PERNOD RICARD 95

4 MANAGEMENT REPORT Analysis of business activity and results Analysis of business activity and results Pernod Ricard uses alternative performance indicators when conducting an analysis of its activity. These indicators are set out on page 101. In 2015/16, Pernod Ricard delivered a solid and encouraging year. The Group achieved its quantitative objectives: Organic growth (1) in net sales of +2%, an improvement on the 2014/15 financial year restated for French technical impact (2) ; An improvement in pricing: +1% (compared with stable over the 2014/15 financial year); Organic growth (1) in Profit from Recurring Operations of 2%, in line with the guidance; Improvement of 7 bps (1) in the recurring operating margin, thanks to tight control of resources and initiatives to increase operating efficiency; Solid growth of Group Net Profit From Recurring Operations up 4% to a historic high; Significant growth in Free Cash Flow at 1,061 million, up 31%; Continuing debt reduction with a decrease in net debt of 0.3 billion and a corresponding decrease in the average Net debt/ebitda ratio to 3.4 (3) (-0.3 excluding currency effect). The Group also undertook significant initiatives to implement its mediumterm strategy and further improve its performance: Acceleration in USA and on innovation; Organisational changes to enhance performance (United States, Travel Retail, China, Korea, etc.); Implementation of an operational efficiency roadmap covering the supply chain, production, purchases and advertising and promotion investments; Active portfolio management and resource allocation with a targeted M&A policy, with the disposal of non-strategic assets (e.g. Paddy) to focus on Premium+ segments undergoing rapid growth (Monkey 47); Sound management of trade inventories; Refinancing at excellent conditions and upgrading by Moody s of Pernod Ricard s rating to Baa2/P2. Furthermore, in 2015/16, there was: An increase in organic growth (1) in Profit from Recurring Operations of +4% in the Americas and +7% in Europe, but a decline of -2% in Asia/Rest of World (impacted by China and Travel Retail); Strong cash generation with Free Cash Flow from recurring operations of 1,200 million, up 4% on the 2014/15 financial year; A proposed dividend per share of 1.88, a 4% increase compared with the previous year. This represents a pay-out ratio of 36%, in line with the customary policy of cash payment of approximately one-third of Group net profit from recurring operations. The following operating changes occurred since 1 July 2016: Simplification of the Americas region, to better focus on its core business, the United States; Creation of two new management entities: one with a lead market of Mexico, combining Colombia, Venezuela and Peru, and another with a lead market of Brazil, combining Argentina, Uruguay and Chile; Establishment of Global Travel Retail, reporting directly to the Headquarters; Completion of the transformation of the affiliate in the United States, based on the following principles: Continue to make the Company fully consumer centric to win over consumers in the long term, by reorganising the marketing team into brand divisions, based around five key moments of Convivialité, Focus Pernod Ricard s resources in the field to speed up decisionmaking and improve excellence in performance in both Off-Trade and On-Trade. To do this, the sales team will be reorganised along territorial lines, with the creation of dedicated Market Entities in four States, three multi-state Divisions, and a Distribution Channel division, all supported by a Route To Market centre of excellence, Stimulate the development of future growth drivers by creating an incubator for brands with high potential, the New Brand Ventures Department. Adjustment of the organisational structure in China to fit the new market context, based on the following principles: Creation of a dedicated sales force for premium brands, consistent with the reallocation of network resources and traditional brands towards new trends, Reorganisation of the marketing team based around moments of Convivialité. Change of organisation in Korea with a new management team and a new commercial team to turnaround business performance. A slight decline in gross margin (-13 bps (1) ) with an improvement in pricing, amid challenging price conditions, and with a negative mix, but strict discipline on cost control (+1% on a constant mix basis); (1) Organic growth, defined on page 101. (2) Shipments brought forward from July to June 2015 ahead of back-office mutualisation between Ricard and Pernod on 1 July (3) Average EUR/US dollar exchange rate of 1.11 over the 2015/16 financial year compared to 1.20 over the 2014/15 financial year. 96 PERNOD RICARD

5 MANAGEMENT REPORT Analysis of business activity and results 4 PRESENTATION OF RESULTS Group Net Profit per share from Recurring Operations diluted million Number of shares in circulation diluted 266,230, ,632,528 Profit from Recurring Operations 2,238 2,277 Operating margin 26.2% 26.2% Financial income/(expense) from recurring operations (457) (422) Corporate income tax on recurring operations (434) (455) Non-controlling interests, profit from discontinued operations and share of net profit from equity associates (18) (20) GROUP NET PROFIT FROM RECURRING OPERATIONS (1) 1,329 1,381 GROUP NET PROFIT PER SHARE FROM RECURRING OPERATIONS DILUTED (in euros) Group Profit from Recurring Operations Group ( million) Reported growth Organic growth (2) Net sales 8,558 8, % 152 2% Gross margin after logistics expenses 5,296 5, % 83 2% Advertising and promotion (1,625) (1,646) (21) 1% (14) 1% Contribution after advertising & promotion 3,671 3, % 68 2% PROFIT FROM RECURRING OPERATIONS 2,238 2, % 46 2% Americas ( million) Reported growth Organic growth (2) Net sales 2,382 2, % 96 4% Gross margin after logistics expenses 1,519 1, % 61 4% Advertising and promotion (478) (509) (31) 7% (26) 6% Contribution after advertising & promotion 1,041 1, % 35 3% PROFIT FROM RECURRING OPERATIONS % 28 4% Asia/Rest of World ( million) Reported growth Organic growth (2) Net sales 3,446 3, % 27 1% Gross margin after logistics expenses 2,073 2,071 (2) 0% (14) -1% Advertising and promotion (627) (621) 6-1% 13-2% Contribution after advertising & promotion 1,446 1, % (1) 0% PROFIT FROM RECURRING OPERATIONS (16) -2% (24) -2% Europe ( million) Reported growth Organic growth (2) Net sales 2,731 2,709 (21) -1% 29 1% Gross margin after logistics expenses 1,704 1,662 (42) -2% 36 2% Advertising and promotion (521) (516) 4-1% (1) 0% Contribution after advertising & promotion 1,183 1,145 (38) -3% 34 3% PROFIT FROM RECURRING OPERATIONS (20) -3% 42 7% (1) Profit from Recurring Operations adjusted for financial result from recurring operations, recurring income tax, share of net result of associates and profit from assets held for sale, as well as non-controlling interests. (2) Organic growth, defined on page 101. PERNOD RICARD 97

6 MANAGEMENT REPORT Analysis of business activity and results NET SALES GROWTH AND VOLUMES OF STRATEGIC BRANDS In millions of 9-litre cases Volume Volume Organic growth (1) in net sales Including Volume growth Including Price/mix Absolut % -2% -1% Chivas Regal % -5% 1% Ballantine s % 5% -2% Ricard % -8% 0% Jameson % 12% 4% Havana Club % 1% 2% Malibu % 1% 0% Beefeater % 3% 1% Kahlúa % -2% 0% Martell % -1% -3% The Glenlivet % -2% 5% Royal Salute % 5% -1% Mumm % 2% -2% Perrier-Jouët % 7% 1% TOTAL TOP % 0% 0% (1) Organic growth, defined on page 101. Full-year sales (1) were 8,682 million, representing reported growth of +1%, as a result of: Organic growth (2) of +2% in a contrasted environment, with growth impacted by the technical effect of anticipating shipments from July to June 2015 ahead of the mutualisation of Pernod and Ricard s back offices on 1 July 2015; A slightly positive currency effect of + 23 million over the year, linked primarily to the strengthening of the US dollar against the euro, despite the weakness of currencies on emerging markets; and a negative scope effect of (52) million. All Regions experienced growth (2) : Americas were up 4% (2), with an acceleration of growth (2) driven by the United States. The performance of both the Group and the market improved over the year, with growth helped by the establishment of a new organisational structure, and the initial results of innovations and growth drivers. Jameson, The Glenlivet and Martell posted very strong growth (2), while Absolut was in decline, but with improving underlying trends. Outside the USA, dynamic growth of +4% (2) was reported in other markets in the region; Asia/Rest of World saw modest growth of +1% (2) with double-digit growth (2) in India and Africa/Middle East, despite difficulties in China, South Korea and Travel Retail Asia. India, the Group s second-largest market (in terms of net sales), posted very good performance of +12% (2) driven by local and imported whiskies, and solid momentum on the Top 14 strategic brands and key local brands. In a climate that remains difficult, sales in China were down 9% (2) ; Europe posted growth of +1% (2) with an improving global performance driven primarily by Spain. Restated for the French technical effect (3), sales in Europe were up 3% (2), and stable in France: In Spain, growth continued, driven by a good performance in gins and whiskies. Furthermore, Travel Retail Europe and Russia proved their resilience in an ongoing challenging environment. (1) Net sales presented after deduction of excise duties (see Accounting principles in the Notes to the consolidated financial statements, Note 2: Segment reporting Net Sales ). (2) Organic growth, defined on page 101. (3) Shipments brought forward from July to June 2015 ahead of back-office mutualisation between Ricard and Pernod on 1 July PERNOD RICARD

7 MANAGEMENT REPORT Analysis of business activity and results 4 CONTRIBUTION AFTER ADVERTISING & PROMOTION INVESTMENTS The gross margin (after logistics expenses) amounted to 5,371 million, or +2% (1). Gross margin stood at 61.9% for the 2015/16 financial year, down slightly by 13 bps (1) compared to a fall of 105 bps (1) during the previous year, due to: pricing improving in a challenging environment with +1% (1) compared to a stable figure last year; a negative mix effect due to the geographic mix (reduction of China s weight in favour of India), that is less significant than last year due to renewed growth in the United States; good cost control (+1% on a constant mix basis), thanks to the first results of operational efficiency initiatives. Advertising and promotion investments were up +1% (1) to 1,646 million, and the ratio remained virtually stable at 19% of sales. Investments are targeted, specifically on key innovation projects and new growth opportunities (particularly in the United States). Many initiatives were undertaken to improve their effectiveness. PROFIT FROM RECURRING OPERATIONS Profit from Recurring Operations was up +2% (1), in line with the increase (1) in net sales, to reach 2,277 million. Structure costs were managed very well, with an increase of 2% (1), which is in line with sales. The currency effect (+0%, or + 6 million) and the scope effect (-1%, or (13) million) remained limited. FINANCIAL INCOME/(EXPENSE) Financial expenses from recurring operations were (422) million, compared with (457) million the previous year. The cost of debt stood at 4.1% for the year, compared with 4.4% for the 2014/15 financial year. For 2016/17, the average cost of debt should be around 3.8%. The debt structure at 30 June 2016 was as follows: the bond portion was approximately 96% of gross debt; the fixed rate portion was 94% of total debt; the maturity of gross debt at the end of June 2016 was six years and eight months; the Group had 0.6 billion in cash and 2.4 billion in available credit facilities (undrawn syndicated loan at 30 June 2016); structuring the debt by currency (USD: 61%) provides a natural hedging mechanism with debt by currency matched with cash flow by currency. GROUP NET PROFIT FROM RECURRING OPERATIONS Tax on Profit from Recurring Operations stood at (455) million, giving a current effective rate of tax of 24.5%, compared with 24.4% at 30 June Non-controlling interests amounted to (20) million. Group net profit from recurring operations reached 1,381 million, up by +4% compared to the 2014/15 financial year, due to: a rise (1) in Profit from Recurring Operations; a reduction in net interest expense. Diluted net profit per share from recurring operations stood at 5.20, up +4%. GROUP NET PROFIT Other non-recurring operating income and expenses amounted to (182) million. Non-current financial income (expense) amounted to a net expense of (10) million. Corporate income tax on non-recurring item as amounted to net income of 46 million. Accordingly, Group net profit stood at 1,235 million, up +43% on 2014/15, with Group net profit having been affected the previous year by the partial impairment of the Absolut brand ( 404 million in net profit after taxes). (1) Organic growth, defined on page 101. PERNOD RICARD 99

8 MANAGEMENT REPORT Net debt Net debt Reconciliation of net financial debt The Group uses net financial debt in the management of its cash and its net debt capacity. A reconciliation of net financial debt and the main balance sheet items is provided in Note 4.9 Financial instruments of the Notes to the consolidated financial statements. The following table shows the change in net debt over the year: million Profit from Recurring Operations 2,238 2,277 Other operating income and expenses (649) (182) Depreciation of fixed assets Net change in impairment of goodwill, property, plant and equipment and intangible assets Net change in provisions (156) (76) Restatement of contributions to pension funds acquired from Allied Domecq Fair value adjustments on commercial derivatives and biological assets (12) (4) Net (gain)/loss on disposal of assets (98) (59) Share-based payments Sub-total of depreciation of fixed assets, change in provisions and others SELF-FINANCING CAPACITY BEFORE FINANCING INTEREST AND TAX (1) 2,296 2,358 Decrease/(increase) in working capital requirements (193) (178) Net interest and tax payments (992) (801) Net acquisitions of non-financial assets and other (302) (317) FREE CASH FLOW 808 1,061 Of which Free Cash Flow from recurring operations 1,154 1,200 Net disposals of financial assets and activities, contributions to pension funds acquired from Allied Domecq (37) (85) Change in the scope of consolidation - - Capital increase and other changes in shareholders equity - - Dividends and interim dividends paid (461) (497) (Acquisition)/disposal of treasury shares (14) (18) Sub-total of dividends, purchase of treasury shares and other (475) (515) DECREASE/(INCREASE) IN DEBT (BEFORE FOREIGN EXCHANGE IMPACT) Foreign currency translation adjustments (964) (157) DECREASE/(INCREASE) IN DEBT (AFTER FOREIGN EXCHANGE IMPACT) (668) 305 Net debt at beginning of period (8,353) (9,021) Net debt at end of period (9,021) (8,716) (1) Excluding investments in pension funds acquired from Allied Domecq. 100 PERNOD RICARD

9 MANAGEMENT REPORT Outlook 4 Outlook Pernod Ricard continued to implement its strategy and confirmed its confidence in its ability to deliver medium-term objectives: organic sales growth between +4% and +5%; improvement in operating margin. For 2016/17, the Group expects: ongoing solid performance in the United States, India, on Jameson and innovations; an improvement in the sales trend compared to the 2015/16 financial year on China, Absolut and Chivas; continued implementation of the operational efficiency roadmap and emphasis placed on its priority brands and innovations; continued strong cash generation. The guidance for 2016/17 is organic growth in Profit from Recurring Operations between +2% and +4%. Definitions and link-up of alternative performance indicators with IFRS indicators Pernod Ricard s management process is based on the following non-ifrs measures which are chosen for planning and reporting. The Group s management believes these measures provide valuable additional information for users of the financial statements in understanding the Group s performance. These non-ifrs measures should be considered as complementary to the comparable IFRS measures and reported movements therein. Recurring indicators The following 3 measures represent key indicators for the measurement of the recurring performance of the business, excluding significant items that, because of their nature and their unusual occurrence, cannot be considered as inherent to the recurring performance of the Group: Recurring Free Cash Flow: Organic growth Organic growth is calculated after excluding the impacts of exchange rate movements and acquisitions and disposals. Exchange rates impact is calculated by translating the current year results at the prior year s exchange rates. For acquisitions in the current year, the post-acquisition results are excluded from the organic movement calculations. For acquisitions in the prior year, postacquisition results are included in the prior year but are included in the organic movement calculation from the anniversary of the acquisition date in the current year. Where a business, brand, brand distribution right or agency agreement was disposed of, or terminated, in the prior year, the Group, in the organic movement calculations, excludes the results for that business from the prior year. For disposals or terminations in the current year, the Group excludes the results for that business from the prior year from the date of the disposal or termination. This measure enables to focus on the performance of the business which is common to both years and which represents those measures that local managers are most directly able to influence. Free Cash Flow Free Cash Flow comprises the net cash flow from operating activities excluding the contributions to Allied Domecq pension plans, aggregated with the proceeds from disposals of property, plant and equipment and intangible assets and after deduction of the capital expenditures. Recurring Free Cash Flow is calculated by restating Free Cash Flow from non-recurring items. Profit from Recurring Operations: Profit from Recurring Operations corresponds to the operating profit excluding other non-current operating income and expenses. Group share of Net Profit from Recurring Operations: Group share of Net Profit from Recurring Operations corresponds to the Group share of Net Profit excluding other non-current operating income and expenses, non-recurring financial items and corporate income tax on non-recurring items. Net Debt Net Debt, as defined and used by the Group, corresponds to total gross debt (translated at the closing rate), including fair value and net foreign currency assets hedging derivatives (hedging of net investments and similar), less cash and cash equivalents. EBITDA EBITDA stands for earnings before interest, taxes, depreciation and amortization. EBITDA is an accounting measure calculated using the Group s profit from recurring operations excluding depreciation and amortization on operating fixed assets. PERNOD RICARD 101

10 MANAGEMENT REPORT Compensation policy Compensation policy CORPORATE OFFICERS COMPENSATION This section has been drawn up with the assistance of the Compensation Committee. Compensation policy for members of the Board of Directors The conditions governing Directors compensation are determined by the Board of Directors on the basis of a recommendation from the Compensation Committee and must fall within the bounds of the total amount allocated by the Shareholders Meeting for Directors fees. Directors annual compensation comprises a fixed portion set at 11,500, with an additional 5,500 for members of the Audit Committee and 3,000 for members of the Strategic Committee, the Compensation Committee, and the Nominations, Governance and CSR Committee. The Chairman of the Audit Committee receives an additional sum of 6,000, while the Chairmen of the Compensation Committee and of the Nominations, Governance and CSR Committee each receive an additional 3,000. Directors are also eligible for a variable portion, calculated on the basis of their presence at Board and Committee meetings. The variable portion is 4,000 per meeting. Furthermore, in order to take account of distance constraints, an additional premium of 1,500 is paid to Directors who are not French residents when they attend Board meetings. Directors who take part in Board meetings by videoconference or conference call are not eligible for this additional amount. Employee Directors receive, in the form of Directors fees, a fixed annual sum of 15,000 for their attendance at meetings of the Board of Directors and of its Committees, if applicable. The Chairman & CEO does not receive Directors fees. Of the 950,000 allocated by the Shareholders Meeting of 6 November 2015, a total of 880,917 in Directors fees was paid to members of the Board of Directors in the 2015/16 financial year, in accordance with the rules set out above. The Vice Chairman of the Board of Directors receives an additional Directors fee of 40,000 each year. Table of Directors fees and other compensation received by Non-Executive corporate officers (in euro) (Table 3 AMF nomenclature): Members of the Board Amounts paid in 2014/15 Amounts paid in 2015/ Ms Nicole Bouton 95,500 99,500 Mr Laurent Burelle 40,750 38,500 Mr Michel Chambaud (1) 35,583 N/A Mr Wolfgang Colberg 83, ,000 Mr Ian Gallienne 85,250 92,500 Mr François Gérard (1) 27,583 N/A Mr César Giron (2) 71,750 73,500 Ms Martina Gonzalez-Gallarza 55,500 55,500 Ms Susan Murray (1) 31,583 N/A Mr Anders Narvinger (3) 117,167 59,583 Mr Pierre Pringuet (4) 38, ,500 Société Paul Ricard represented by Mr Paul-Charles Ricard (2) (5) 43,500 39,500 Mr Gilles Samyn 52,333 71,500 Ms Kory Sorenson (6) N/A 50,834 Ms Veronica Vargas (7) 21,292 55,500 Mr Sylvain Carré (2) 15,000 15,000 Mr Manousos Charkoftakis (2) 15,000 15,000 TOTAL 830, ,917 N/A: not applicable. (1) Until 6 November (2) In addition to Directors fees, Messrs César Giron and Paul-Charles Ricard also received compensation in their respective capacities as Chairman & CEO of Martell Mumm Perrier-Jouët (MMPJ) and Marketing Manager of Martell Mumm Perrier-Jouët (MMPJ). Messrs Sylvain Carré and Manousos Charkoftakis, Employee Directors, also received compensation in their respective capacities as Production Team Leader at Pernod S.A. and Area Sales Manager for Crete and the Aegean Islands at Pernod Ricard Hellas. (3) Until 6 November (4) From 11 February 2015, the end of his term of office as Chief Executive Officer. (5) Permanent representative of Société Paul Ricard, Director. (6) From 6 November 2015, the date on which she was appointed as a Director by the Shareholders Meeting to replace Mr Anders Narvinger. (7) From 11 February 2015, date of her co-option as a Director to replace Ms Danièle Ricard. PERNOD RICARD

11 MANAGEMENT REPORT Compensation policy 4 Compensation policy for the Executive Director 1. Overall criteria of the policy The compensation policy for the Executive Director of Pernod Ricard is established by the Board of Directors on the basis of recommendations from the Compensation Committee. This policy is regularly reviewed and discussed by the Board of Directors. During the 2015/16 financial year, members of the Compensation Committee looked into regulatory developments and best practices in terms of proper governance and the level of transparency of the component parts of the Executive Director s compensation package, and made proposals to the Board of Directors for the practical implementation of a number of measures for Pernod Ricard. In its analysis and proposals to the Board, the Compensation Committee is particularly careful to follow the recommendations of the AFEP-MEDEF Code, which the Group uses as reference. The Board takes particular care to adhere to the following core principles: Overview and balance All the elements comprising the compensation package for the Executive Director are reviewed annually and their respective weightings are considered: fixed and variable compensation, volumes and the value of any stock option and/or performance-based share allocations as well as the criteria for definitive allocation, social security benefits and deferred commitments such as the supplementary pension scheme. Simplicity and consistency Based on the recommendations of the Compensation Committee, the Board of Directors seeks to implement a compensation policy for the Executive Director that is straightforward, easy to understand and consistent over time. As an example, the decision was therefore made some years ago not to pay Directors fees to Executive Directors, ensuring impartiality. The Compensation Committee and the Board of Directors take regular steps to ensure that the elements of the compensation policy for the Executive Director are fully consistent with the policy for all members of the Group s Management team. Such consistency helps to unite players who are key to the Group s development around shared criteria that are known to all. Motivation and performance In its recommendations to the Board of Directors, the Compensation Committee aims to propose a compensation policy commensurate with the responsibilities of each recipient and in line with the practices of large international corporations. The Executive Director of Pernod Ricard receives consistent annual compensation (fixed and variable) in comparison to the compensation paid to his counterparts in French groups that are listed on the CAC 40. In addition, the variable portion granted in the form of stock options and performance-based shares is historically reasonable. In its recommendations, the Compensation Committee is careful to maintain this balance between motivation and performance, while also taking into consideration Executive Directors compensation in other corporations especially in spirit industry, around the world. Lastly, the policy on variable compensation (setting the criteria for the annual variable portion and the performance conditions for stock options and performance-based shares) is kept under regular review, based on the Group s strategic priorities. 2. Fixed portion The amount of the fixed portion is determined on the basis of the responsibilities of the Executive Director. Every year, a study is carried out with the help of specialist firms on the positioning of compensation for the Executive Director in relation to the practices of other CAC 40-listed French companies and other spirits corporations around the world. 3. Variable portion Several years ago, the Board of Directors defined a method for calculating the variable portion of Executive Directors compensation that was designed to provide a significant incentive. The procedure is based on ambitious quantitative and qualitative criteria in order to align Directors compensation with Group performance. This variable portion is expressed as a percentage of the annual fixed portion. It may vary between 0% and 110% if the quantitative and qualitative targets are achieved (target level), and can rise to a maximum of 180% if the Group records exceptional financial performance in relation to the targets. The criteria are reviewed regularly and modified on an occasional basis. During the 2015/16 financial year, on the recommendation of the Compensation Committee, the Board reviewed the criteria and adopted the following: achievement of the target for Profit from Recurring Operations: the weight of this criterion may vary between 0 and 30% of the fixed compensation if the target is achieved, rising to a maximum of 55% if the target is significantly exceeded. This criterion, intended to foster an incentive to exceed the target for Profit from Recurring Operations, restated for foreign exchange impact and scope changes, is one of the key elements of the Group s decentralised structure. The concept of a commitment to the Profit from Recurring Operations budget helps bring together the Group s various departments, which are rewarded according to the extent to which they meet their own targets for Profit from Recurring Operations. This criterion rewards the management performance of the Executive Director; achievement of the target for Group Net Profit from Recurring Operations: the weight of this criterion may vary between 0 and 20% if the target is achieved and up to 40% if significantly exceeded. This criterion, restated for currency effects and changes in the scope of consolidation, takes account of all of the Group s financial items over the financial year and thus helps to best align the Executive Director s compensation with shareholders remuneration; reduction in Group debt (Net debt/ebitda ratio): the weight of this criterion varies between 0 and 30% if the target is achieved and up to 55% for an exceptional level of debt reduction, restated for currency effects and changes in the scope of consolidation. The inclusion of this criterion in the calculation of the variable portion paid to the Executive Director is in line with the Group s target. It also applies to operating affiliates Management Committees in the form of a cash flow generation target during the year. This evaluation of debt reduction is restated for currency effects and changes in the scope of consolidation; PERNOD RICARD 103

12 MANAGEMENT REPORT Compensation policy qualitative criteria: these criteria may vary between 0 and a maximum of 30% of the fixed annual compensation. The individual performance of the Executive Director is assessed annually by the Board of Directors on the recommendation of the Compensation Committee. The qualitative criteria assessed are reviewed annually, based on the Group s strategic priorities. For confidentiality reasons regarding the Group s strategy, details of qualitative objectives can only be made public after assessment by the Board of Directors. 4. Stock option and performance-based share allocation policy for the Executive Director As part of its stock option and performance-based share allocation policy, the Board of Directors has implemented the following principles: the Executive Director s entire allocation is subject to the performance condition(s). Such condition(s) are internal or external performance conditions, or a combination of both where possible and relevant; the economic value of the total award made to Executive Director is limited to 5% of the plan s total economic value (the plan s total economic value comprises all elements distributed); the financial amount of the allocation to the Executive Director is proportional to his individual annual compensation, and adds to his motivation to achieve medium and long-term financial performance for the Group; the total volume of stock options subject to performance conditions awarded to the Executive Director must not exceed the specific ceiling of 0.21% of the share capital on the allocation date, as provided in the 23 rd resolution of the Shareholders Meeting of 6 November 2015; the total volume of performance-based shares awarded to the Executive Director must not exceed the specific ceiling of 0.06% of the share capital on the allocation date, as provided in the 22 nd resolution of the Shareholders Meeting of 6 November 2015; the Board of Directors requires the Executive Director: to retain in a registered form until the end of his term of office a number of shares corresponding to (i) in respect of stock options, 30% of the capital gain since acquisition, net of social security contributions and taxes, resulting from the exercise of the stock options, and (ii) in respect of performance-based shares, 20% of the volume of performance-based shares that have been actually transferred to him, to undertake to buy a number of additional shares equal to 10% of the performance-based shares transferred, at the time that the performance-based shares are actually transferred to him, once an Executive Director holds a number of registered Company shares that correspond to more than three times his or her gross fixed annual compensation at that time, the abovementioned obligation will be reduced to 10% for stock options and for performance-based shares and the Executive Director concerned will no longer be required to acquire additional shares. If, in the future, his registered holdings fall below the three-times ratio, the lock-in and acquisition requirements cited above will again apply; in accordance with the Code of Conduct approved by the Board of Directors (see Section 2 Corporate governance and internal control, paragraph Directors Code of Conduct ) and the AFEP-MEDEF Code, the Executive Director has formally committed to refrain from using hedging mechanisms for any stock options and performancebased shares received from the Company. A combined allocation plan was implemented by the Board of Directors meeting of 6 November 2015, under authorisations to allocate stock options and performance-based shares granted for a period of 38 months by the Shareholders Meeting of 6 November The terms and conditions, including the volumes granted under the plan of November 2015 for the Executive Director, are disclosed in the elements of compensation due or granted in respect of the 2015/16 financial year ( Say on Pay ) in the section 7 Combined (Ordinary and Extraordinary) Shareholders Meeting of 17 November 2016 of this Registration Document. 5. Policy on deferred commitments In accordance with recommendations of the AFEP-MEDEF Code, Mr Alexandre Ricard, at the time of his appointment as the Chairman and CEO of the Group, resigned on 11 February 2015 from his suspended contract of employment and, consequently, waived his right to the benefits related to that contract. Since that date, Mr Alexandre Ricard no longer has a contract of employment with Pernod Ricard. His compensation relates entirely to his directorship. Contract of employment/term of office (Table 11 AMF nomenclature) Executive Directors Contract of employment Supplementary defined-benefit pension scheme Indemnities or advantages due or liable to be due by virtue of the discontinuance of or change in his or her positions Indemnities relating to a non-compete clause Yes No Yes No Yes No Yes No Mr Alexandre Ricard, Chairman and CEO (1) X X X X (1) Mr Alexandre Ricard resigned from his contract of employment on 11 February 2015, when he was appointed Chairman and CEO. Before this, his contract of employment with Pernod Ricard had been suspended since 29 August PERNOD RICARD

13 MANAGEMENT REPORT Compensation policy 4 In addition, Mr Alexandre Ricard, as Chairman & CEO, benefits from: One-year non-compete clause a one-year non-compete clause (corresponding to 12 months of compensation: last fixed + variable annual compensation decided by the Board of Directors). The purpose of this non-compete clause is to prevent the Executive Director from performing duties for a competitor. It is a protection mechanism for the Company. In accordance with the AFEP-MEDEF Code, a provision authorises the Board of Directors to waive the application of this clause when the Executive Director leaves; Imposed departure clause an imposed departure clause (corresponding to a maximum of 12 months of compensation: last fixed + variable annual compensation decided by the Board of Directors) subject to performance conditions. In accordance with the AFEP-MEDEF Code, this amount will be due in case of a change of control or strategy of the Group, but there would be no payment in case of a departure related to i) non-renewal of his term of office, ii) if the departure was decided by the Executive Director himself, iii) in case of a change of position within the Group or iv) if he is able to benefit in the near future from pension rights. The imposed departure clause is subject to the following three performance criteria: 1 st criterion: bonus rates achieved over the term(s) of office: criterion number 1 will be considered as met if the average bonus paid over the entire length of the term(s) of office is no less than 90% of the target variable compensation; 2 nd criterion: growth rate of Profit from Recurring Operations over the term(s) of office: criterion number 2 will be considered as met if the average growth rate of Profit from Recurring Operations vs budget of each year over the entire length of the term(s) of office is more than 95% (adjusted from foreign exchange and scope impacts); 3 rd criterion: average sales growth over the term(s) of office: criterion number 3 will be considered as met if the average sales growth over the entire length of the term(s) of office is greater than or equal to 3% (adjusted from foreign exchange and scope impacts). The amount of the compensation paid under the imposed departure clause is calculated as follows: if all three criteria are met: payment of 12 months compensation (1) ; if two of the three criteria are met: payment of 8 months compensation (1) ; if one of the three criteria is met: payment of 4 months compensation (1) ; if no criterion is met: no compensation paid. In accordance with the AFEP-MEDEF Code, the overall amount of the non-compete clause and the imposed departure clause will be capped at (sum of both clauses) 24 months compensation (fixed + variable). Pursuant to the regulated agreements and commitments procedure, these commitments were approved by the Shareholders Meeting of 6 November 2015 (5 th resolution). The Shareholders Meeting of 17 November 2016 (5 th resolution) will be asked to approve the renewal of these regulated agreements benefiting Mr Alexandre Ricard, subject to the renewal of his term of office as Executive Director by the Board of Directors to be held at the close of the Shareholders Meeting. Defined-benefit supplementary pension scheme During the Board of Directors meeting of 11 February 2015, Mr Alexandre Ricard was allowed to retain the benefits of the supplementary and conditional defined-benefit pension scheme described below. The defined-benefit supplementary pension scheme for the Executive Director, as described below, corresponds to the scheme applicable to Mr Alexandre Ricard during the 2015/16 financial year. The Executive Director and French Senior Management team of Pernod Ricard have a conditional defined-benefit supplementary pension scheme (Article 39) under article L of the French Social Security Code, provided that they: have at least 10 years seniority within the Group when they leave or retire, are at least 60 years of age on the date of leaving or retirement, have wound up the basic and complementary French social security pension schemes (ARRCO, AGIRC (T1 and T2)), permanently put an end to their professional career, and end their professional career within the Group. In accordance with regulations, employees aged over 55 whose contract is terminated and who do not take up another job are deemed to have retired. The Board of Directors has consistently chosen to treat the Group s Executive Directors in the same way as its Senior Managers, especially with regard to elements comprising compensation and advantages, including supplementary pensions. It therefore signalled at its meeting of 12 February 2009 that the termination of an Executive Director s mandate can be assimilated with the termination of a work contract, subject to the above-mentioned conditions regarding age and failure to take up another job. The aim of the scheme is to allow the Group s Senior Managers to supplement the pension provided by France s mandatory state-run pension scheme. It offers retired beneficiaries a life annuity that can be passed on to their spouse and/or ex-spouse in the event of death. Pensions are proportionate to the beneficiary s length of service, with an upper limit of 20 years. Pensions are calculated on the basis of the beneficiary s average compensation (fixed and variable) over the three years preceding his or her retirement. The amount of the supplementary annuity is calculated by applying the following coefficients to the basis of calculation: for the portion of the compensation between 8 and 12 times France s annual social security ceiling, the coefficient is 2% multiplied by the number of years service (capped at 20 years, i.e. 40%), between 12 and 16 times France s annual social security ceiling, the coefficient is 1.5% per year of service (capped at 20 years, i.e. 30%), and in excess of 16 times France s annual social security ceiling, the coefficient is 1% per year of service (capped at 20 years, i.e. 20%) The supplementary pension equals the sum of the three amounts above. In addition, the rights granted under this plan, added to those of other pensions, cannot exceed two-thirds of the amount of the beneficiary s most recent fixed annual compensation. A provision is entered on the balance sheet during the build-up phase (while the Executive Director is active) and, when the beneficiary claims his or her pension, the capital is transferred to an insurer and thus entirely outsourced. (1) Last annual fixed and variable compensation decided by the Board of Directors. PERNOD RICARD 105

14 MANAGEMENT REPORT Compensation policy Funding for this scheme is the responsibility of Pernod Ricard, which pays premiums to a third-party insurance agency to which it has entrusted management of this pension scheme. Pursuant to the provisions of Decree No of 23 February 2016, at 30 June 2016, the estimated gross amount of the annuity potentially paid under the supplementary defined-benefit pension scheme for Mr Alexandre Ricard was 173,105 per year. The relevant social security contributions falling due to Pernod Ricard stood at 24% of the contributions transferred to the insurer. Supplementary pension scheme Given the current high charges of the defined-benefit supplementary pension scheme (article L of the French Social Security Code) and its loss of efficiency, the Board of Directors at its meeting of 31 August 2016 (1), acting on the recommendation of the Compensation Committee, decided to remove this advantage granted to Mr Alexandre Ricard, Executive Director, as of the renewal of his term of office as Executive Director, which will be put to the Board of Directors meeting to be held at the close of the Shareholders Meeting of 17 November In return for the removal of the defined-benefit supplementary pension scheme and to take account of the fact that the Executive Director must then be personally responsible for establishing his own supplementary pension, the Board of Directors, on the recommendation of the Compensation Committee, decided to compensate Mr Alexandre Ricard, subject to (i) the renewal of his term of office as Executive Director by the Board of Directors meeting to be held at the close of the Shareholders Meeting of 17 November 2016 and (ii) the vote by the Shareholders Meeting of 17 November 2016 on the resolution regarding the allocation of free shares, via the granting of two components of additional compensation: an exceptional component intended to allow the Executive Director to build up seed capital allowing him to establish his supplementary pension. This will consist of an exceptional allocation of 26,968 free shares that will be vested, subject to a presence condition, in instalments over a period of three years (i.e. 8,989 shares in November 2017, 8,989 shares in November 2018 and 8,990 shares in November 2019). At the end of the vesting period, they will all be subject to a lock-in period that shall be no less than two years. The Board of Directors wished to arrange compensation exclusively in shares so as to ensure total alignment of interests with that of the shareholders. These shares have an IFRS value of 2,668 million. Since this allocation is intended to partially compensate the rights granted in connection with the defined-benefit supplementary pension scheme which will no longer apply to the Executive Director, the Board of Directors, acting on the recommendation of the Compensation Committee, decided not to submit said shares to performance criteria. However, it did wish to impose a presence condition by spreading the vesting period over three years. This exceptional allocation of free shares will be subject to the approval of the relevant resolution by the Shareholders Meeting of 17 November 2016 (16 th resolution) and as part of a specific plan to be implemented by the Board of Directors following the Shareholders Meeting. an annual component equal to 10% of his annual fixed and variable compensation, paid each year with effect from 2017: half (i.e. 5%) in the form of the allocation of performance-based shares, the number of which will be determined based on the IFRS value of shares when the allocation occurs, which must be approved by the Board of Directors each year. The conditions relating to performance, presence and holding that will apply to these allocations will be the same as those outlined under the allocation of Group performance-based shares plan in effect on the grant date, and half (i.e. 5%) in cash. It is made clear that the Executive Director will commit to invest the cash component of this additional compensation he may receive, net of social security contributions and tax, in investment vehicles dedicated to financing his supplementary pension. Based on the calculations made by a consulting actuary and verified by a second consulting actuary, this decision to terminate the Executive Director s defined-benefit supplementary pension scheme will result in a reversal of provision of 7.0 million in the consolidated financial statements for the 2016/17 financial year and a saving for the Company of approximately 39%, i.e. 7.1 million (composed of 3.8 million for past services and 3.3 million for future services). Collective healthcare and welfare schemes The Board of Directors, held on 11 February 2015, allowed Mr Alexandre Ricard to retain the collective healthcare and welfare schemes offered by the Company under the same terms as those applicable to the category of employees to which he belongs for the determination of his welfare benefits and other additional elements of his compensation. In accordance with the regulated agreements and commitments procedure, this commitment was approved by the Shareholders Meeting of 6 November 2015 (5 th resolution). The Shareholders Meeting of 17 November 2016 (5 th resolution) will be asked to renew this commitment benefiting Mr Alexandre Ricard, subject to the renewal of his term of office as Executive Director by the Board of Directors to be held at the close of the Shareholders Meeting. (1) A notice was published online on 5 September 2016 detailing this removal. 106 PERNOD RICARD